Free Markets and the Law
Free markets are great, in theory. In practice, they are much closer to good.
The idea is that free markets allow people to advance their own self-interest, which in turn advances society at large. While this theory is oft-quoted and works better than other systems we have come up with, the truth is more complicated.
Free markets do not form in isolation. A series of laws creates the market. These laws can act as constraints or can encourage inefficient outcomes.
For example, making one form of compensation tax deductible (or off-balance sheet) in the case of base compensation under $1 million (or stock options) can create sub-optimal compensation schemes. These two pieces of the tax code encourage the use of options and discourage high base salaries. In other words, the equilibrium reached in such a market may not be optimal.
Recently, I experienced firsthand a law that created some perverse incentives. I was in Minneapolis this weekend for a wedding. The rehearsal was supposed to last until 3:45 but ended up lasting until 4:10. The problem was that my parking spot was only legal until 4:00.
As my pregnant wife walked out to our car with our son, a tow truck driver looked at them as they tried to stop him and drove away. My son’s car seat, diapers, and medicine were in the car. Needless to say, this was a costly inconvenience for us and could have been much worse. All because we were parked in a spot ten minutes over the limit!
After talking to the towing company, other stranded motorists at the impound lot, and the workers at the impound lot I pieced together the problem. Tow companies are paid based on the volume of cars they bring to the impound lot and they can only tow a car once a ticket has been issued. At least three of us stranded at the impound lot, including me, received a ticket and got towed within ten minutes.
It’s obvious what is going on here: Tow companies are following around ticketing officers and loading as many cars as they can as fast as they can. But do we really want people to be towed if they are parked ten minutes over the legal limit? It seems to me that the punishment does not fit the crime.
The problem is that the incentives created are encouraging an inefficient process. First, extra resources are wasted by creating excessively large towing and impound industries. Second, the people without cars have to find a way to reach the impound lot. Third, had my wife not seen the tow truck I probably would have wasted police resources assuming my car was stolen.
In short, it more efficient for people to be ticketed for minor violations of the law. Confiscation of property should be reserved for gross misconduct. In English, if you outstay your legal rights by a couple minutes you should receive a slap on the wrist; if you blatantly disregard the law, then other more dramatic remedies may be useful.
It is easy to see how this market, created by a legal structure, is far from optimal.
